Business Governance and Corporate GovernanceCase Study onCorporate Governance of Urban Co-Operative Banks in India : An Overview

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Table Of Contents

What is corporate governance?.............................3Why was it in the news recently?..........................3Corporate Governance Framework............................3Why Corporate Governance Matters..........................3Types & Function of Co-operative Banks in India...........3Role Of UCB:..............................................4Background of UCBs........................................4Status of UCBs in India:..................................5Areas required to Strengthening Measurement:..............6Measures :................................................6Problems:.................................................6Suggestions:..............................................6Corporate Governance in Co-operative Banks................7Regulatory measures taken to introduce the Corporate Governancein UCBs...................................................8Measures in Cooperative Acts..............................8Hurdles or Lacunae In Implementing Corporate Governance. . .8Conclusion................................................9Kumar Mangalam committee on Corporate Governance..........9The Purpose:.............................................9The Recommendations of the Committee....................10Mandatory Recommendations:..............................10Non-Mandatory Recommendations:..........................10

Naresh Chandra Committee Report..........................11Recommendation and Changes:.............................12Committee's Mandatory Recommendation:...................12National Foundation for Corporate Governance (NFCG).....13Harmonization...........................................13

Cadbury Committee Report on Corporate Governance.........14Objectives..............................................14Best Practices..........................................14Code of Best Practice and Recommendations.............14Role of Auditors and Recommendations to the Accountancy Profession............................................15Dealing with the Rights and Responsibilities of Shareholders......................................................15

N.R Narayan Murthy Report on Corporate Governance........16Terms of Reference of the committee:....................16Mandatory Recommendations:..............................16Non-mandatory Recommendations:..........................17

References...............................................17

What is corporate governance?Corporate Governance refers to the structures & processes for theefficient & proper direction & control of companies (both private andpublic) in the interest of all stakeholders. Stakeholders.

Why was it in the news recently?Corporate governance has most recently been debated after thecorporate fraud by Satyam founder and chairman Ramalinga Raju. Infact, trouble started brewing at Satyam around December 16 when Satyamannounced its decision to buy stakes in Maytas Properties andInfrastructure for $1.3 billion. The deal was soon called off owing tomajor discontentment on the part of shareholders and plummeting share-price. However, in what has been seen as one of the largest corporatefrauds in India, Raju confessed that the profits in the Satyam bookshad been inflated and that the cash reserve with the company wasminimal. Ironically, Satyam had received the Golden Peacock GlobalAward for Excellence in Corporate Governance in September 2008 but wasstripped of it soon after Raju's confession.

Corporate Governance Framework Governance Principles Legal / Regulatory Codes of Best Practice Stakeholder Relations Self Regulation Ethical Standards Risk Management

Why Corporate Governance Matters Enhances performance of companies Enhances access to capital Enhances long term prosperity. Provides a barrier to corrupt dealings- limiting

discretionary decision making, increasing oversight, introducing Codes of Ethics etc

Impacts on the society as a whole: Better companies, Better societies.

Types & Function of Co-operative Banks in IndiaThe co-operative banks are small-sized units which operate bothin urban and non-urban centers. They finance small borrowers inindustrial and trade sectors besides professional and salaryclasses. Regulated by the Reserve Bank of India, they aregoverned by the Banking Regulations Act 1949 and banking laws(co-operative societies) act, 1965. The co-operative bankingstructure in India is divided into following 5 categories:

Primary Co-operative Credit Society Central Co-operative Banks

State Co-operative Banks

Land Development Banks

Urban Co-operative Banks

Role Of UCB:The term Urban Co-operative Banks (UCBs), though not formallydefined, refers to primary co-operative banks located in urbanand semi-urban areas. These banks, till 1996, were allowed tolend money only for non-agricultural purposes. This distinctiondoes not hold today. These banks were traditionally centered oncommunities, localities, work place groups. They essentiallylend to small borrowers and businesses. Today, their scope ofoperations has widened considerably.

The origins of the urban co-operative banking movement in Indiacan be traced to the close of nineteenth century Co-operativesrepresented a new and alternative approach to organization asagainst proprietary firms, partnership firms, and joint stockcompanies which represent the dominant form of commercialorganization. They mainly rely upon deposits from members andnon-members and in case of need, they get finance from eitherthe district central co-operative bank to which they areaffiliated or from the apex co-operative bank if they work inbig cities where the apex bank has its Head Office. Theyprovide credit to small scale industrialists, salariedemployees, and other urban and semi-urban residents.

Background of UCBs The origins of the urban co-operative banking movement in Indiacan be traced to the close of nineteenth century. Inspired bythe success of the experiments related to the cooperativemovement in Britain and the co-operative credit movement inGermany, such societies were set up in India. Co-operativesocieties are based on the principles of cooperation, mutualhelp, democratic decision making, and open membership.Cooperatives represented a new and alternative approach toorganization as against proprietary firms, partnership firms,and joint stock companies which represent the dominant form ofcommercial organization. They mainly rely upon deposits frommembers and non-members and in case of need, they get financefrom either the district central co-operative bank to which

they are affiliated or from the apex co-operative bank if theywork in big cities where the apex bank has its Head Office.They provide credit to small scale industrialists, salariedemployees, and other urban and semi-urban residents. Cooperative Banks in India are registered under the Co-operativeSocieties Act. The cooperative bank is also regulated by theRBI. They are governed by the Banking Regulations Act 1949 andBanking Laws (Co-operative Societies) Act, 1965. A co-operativebank is defined as "a financial entity which belongs to itsmembers, who are at the same time the owners and the customersof their bank. The term Urban Cooperative Banks (UCBs),although not formally defined, refers to the primarycooperative banks located in urban and semi-urban areas. Thesebanks, until 1996, were allowed to lend money only to non-agricultural purposes. This distinction remains today. Thesebanks have traditionally been around communities, localitiesworking out in essence, loans to small borrowers andbusinesses. Today their scope of operation has expandedconsiderably.

Status of UCBs in India: Indian Banking system is on its sound footing UCBs in India areplaying major role in servicing rural economy and there is noneed to worry as evident from following data regarding UCBs inIndia.

Total Number of Banks in India 1770 Total Deposits Rs.1, 12,000 crs

Total Advances Rs. 78,000 crs.

Total No. of scheduled banks in India 53

Total No.of Mahila Banks 139

Total No. of Mahila Banks in Mah. 27

Total No.of 1 Unit Banks 900

Salary Earner Banks 24

Total deposits of scheduled banks Rs. 51,173 crs (42% oftotal deposits of UCBs)

Total advances scheduled banks Rs. 32, 884 crs.

Gradation of Banks all India level

Grade-I Banks 690

Grade-II 430

Grade-III 390

Grade-IV 260

The Department performs these functions through its 17regional offices.

I. Regulatory Functionsa. Licensing of New Primary (Urban) Cooperative Banks

b. Licensing of Existing Primary (Urban) Co-operativeBanks

c. Branch Licensing

d. Statutory Provisions

i. Minimum Share Capital

ii. Maintenance of CRR and SLR

II. Supervisory Functions

III. Developmental Functions

IV. Sections / Divisions of Urban Banks Department

a. Administration

b. New Bank Licensing and Branch Licensing

c. Returns

d. Banks Supervision

e. Banking Policy

With the onset of liberalization, Co-operative banks in Indiaare under pressure to change the ways in which they dobusiness. They now face an increasingly competitive environmentnot only from banks but also from non-bank financialinstitutions. Explosive growth in IT has changed the wayindividuals interact with banks and the way banks respond. Inthe changed scenario, success will depend on the ability ofbanks to leverage the human potential and capabilities,Marketing of Banking products, G-sec Market, Customer valueadded services, competitive pricing of deposits and advances,good corporate governance, information & Technology. Co-operative banking – The challenges ahead In recent years, therehas been a considerable widening and deepening of the Indianfinancial system, of which banking is a significant component.With greater liberalization, the financial system has come toplay a much larger role in the allocation of resources than inthe past and its role in future can be expected to be muchlarger than at present. The growing role of the financialsector in the allocation of resources has significant potentialadvantages for the efficiency with which our economy functions.Net profits of UCBs improved in 2010-11 as compared to theprevious year owing to higher growth of their total income. Butthe gross as well as net NPA ratio of UCB sector declined.

Areas required to Strengthening Measurement: The pattern of resources of Urban cooperative banks(owned

funds, deposits, and borrowings) The deployment of resources The management and supervision The role of UCBs in the financial system The regulatory framework for cooperatives

Measures : Strengthening of regulatory and supervisory framework Enhancing capital adequacy standards Introducing stringent licensing norms for new entrants

into the sector Enabling legal amendments and Corporate governance measures need to be given very close attending

Problems: Major Problems faced on the UCBs relate to the followingaspects:

o Restrictions relating to share capital. o Automatic conversion of credit societies. o Dual control and regulations by the RBI and

respective state governments on UCB leads to delayand difficulties.

o Other problems like lack of professionalism, unsatisfactoryetc.,

Suggestions: o Licensing Policy should be transparent, precise and simple o Corporate governance is essential for the effectivefunctioning of any financial organization. The UCBsappointed directors in the board should require suitableprofessional qualifications, experience and they should nothave any relationship with other banks.

o In addition to its own funds, the ucbs should generate fundsfrom outsources

o Ucbs should make changes in their regulatory frame work forstrengthening recovery mechanism

o Ucbs should maintain computerised reporting system for readyinformation and competing the commercial banks.

o Ucbs should ready for doing functions of modern banks likecommercial banks for increasing their income sources

Corporate Governance in Co-operative Banks Cooperative organizational structure is very unique and

innovative. Proper understanding of cooperative culture, cooperative

ethics, values and principles is essential to evaluated Corporate Governance in the context of cooperatives.

Cooperative Values Co-operatives are based on the values of self-

responsibility, democracy, equality and solidarity. Inthe tradition of their founders, cooperative membersbelieve in the ethical values of honesty, openness,social responsibility and caring for others. TheCooperative Values are vision statement for cooperatives.

Cooperative PrinciplesThe Cooperative Principles, popularly called asCooperative Rainbow are guidelines by which Cooperativeput their values into practice. They are MissionStatements for Cooperatives.

1st Principle: Voluntary and open Membership 2nd Principle : Democratic Member Control 3rd Principle: Member Economic Participation 4th Principle: Autonomy and Independence 5th Principle: Education, Training and Information

to members and their representatives/employees 6th Principle : Cooperation Among Cooperatives 7th Principle : Concern For Community Co-

operatives work for the sustainable development of their communities.

Critical analysis of definition, values and principles ofcooperatives vis-à-vis ingredients or hallmark of Cooperative Governance and its involvement conspicuously and clearly indicate that

The principles of Corporate Governance are notalien to cooperatives but they are rather innate withthem.

The hallmark of good Corporate Governance are very much akin to cooperative values which is a vision statement for cooperatives while cooperative principles constitute mission statement.

The Corporate Governance principles for Doyenscould be a management theory or concept for directingthe corporate. However for visionaries ofcooperative, the cooperative values and principlesare article of faith of cooperatives

The UCBs are integral part of cooperatives with their focus on lower middle class populace.

Regulatory measures taken to introduce the Corporate Governance in UCBs

Amendments in BR Act 1949, to introduce professionalism in Cooperative Banks.

RBI guidelines prescribing Dos’ and Don’ts for directors. Appointment of Madhavdas Committee and its

Recommendations in 1978. High Power Committee. Joint Parliamentary Committee 2003 CAMEL Rating Guidelines. TAFCUB and MOUs with State or Central Government. Risk Based Supervision. Risk Management / Risk Management Audit.

Measures in Cooperative Acts Comprehensive provisions for composition of Board giving

representation to various sections of the society. Prohibitions on loans and advances to Directors and other

restrictive provisions to avoid malpractices. Explicit provisions for fixing accountability of the

persons involved for financial loss caused to the Bank, and also for negligence & false reporting on financial state of affairs of the Bank.

Provisions for appropriation of profit for sustainable growth, and serving the cause of welfare of employees, promotion of cooperative movement and society at large.

Norms for Audit Classification. Effective provisions for loan recoveries. OTS for expediting recoveries.

Hurdles or Lacunae In Implementing Corporate Governance

Inadequate understanding of banking principles at Boardand senior management level, obviously because urban co-operative banks are generally floated by common people.

Ignorance for self-sustainable growth with specificreference to prudential norms.

Preference to short term achievements at cost of longterm objectives.

Unhealthy competition among the Cooperative Banks. Wrong notions of Board of Directors/CEO about the growth

and progress of the Bank. Connected lending. Corrupt practices. Misconceptions or ignorance of the Board of Directors

about their Role, ccountability and Responsibility. Lack of professionalism. Chairman or CEO centric functioning. Non-remunerative post of elected directors. Undue importance to the interests of the borrowers at the

cost of welfare depositors. Poor Risk Management and Control System. Politicization. No due importance to or Ineffective Internal Audit. No statutory restriction on tenure of directorship. Importance to electoral merits of directors rather than

their qualitative merits. Apathy of members/shareholders. Grey areas in dual control.

Conclusion Presently, the UCBs occupy an important place in the IndianFinancial system. However the ucbs strengthen their uniquenessand growth in the banking industry and it is required to takecertain measures like for strengthening the ucbs sector

sustenance of its growth is attendant to Professionalization ofits management, inculcating good corporate governance,technology absorption and scrupulous adherence to regulatoryframework. Let us hope that the urban cooperative bankingsector will learn from its past experiences and adjust to newrealities since banking is risky business. In future the urbancooperative banks are ready to face many challenges in thecompetitive environment of both Public and Private sector banksexpansion activities both vertically and horizontally.

Recommendations Continued advocacy on the benefits of Corporate Governance Codes of Corporate Governance for countries Capacity building

Kumar Mangalam committee on Corporate Governance The Purpose:The primary objective of the committee was to view corporategovernance from the perspective of the investors andshareholders and to prepare a ‘Code’ to suit the Indiancorporate environment. The committee had identified theShareholders, the Board of Directors and the Management as thethree key constituents of corporate governance and attempted toidentify in respect of each of these constituents, their rolesand responsibilities as also their rights in the context ofgood corporate governance.

 The Committee therefore agreed that the fundamental objectiveof corporate governance is the “enhancement of shareholdervalue, keeping in view the interests of other stakeholder.

It follows that the real onus of achieving the desired level ofcorporate governance, lies in the proactive initiatives takenby the companies themselves and not in the external measureslike breadth and depth of a code or stringency of enforcement

of norms. The extent of discipline, transparency and fairness,and the willingness shown by the companies themselves inimplementing the Code, will be the crucial factor in achievingthe desired confidence of shareholders and other stakeholdersand fulfilling the goals of the company

The Recommendations of the Committee

The committee divided the recommendations into two categories:

Mandatory: The recommendations which are absolutely essential for corporate governance can be defined with precision and which can be enforced through the amendment of the listing agreement could be classified as mandatory.

Non- mandatory. Which are either desirable or which may require change of laws, may, for the time being, be classified as non-mandatory.

Mandatory Recommendations:

Applies To Listed Companies With Paid Up Capital Of Rs. 3Crore And Above

Composition Of Board Of Directors – Optimum Combination OfExecutive & Non-Executive Directors

Audit Committee – With 3 Independent Directors With OneHaving Financial And Accounting Knowledge.

Remuneration Committee

Board Procedures – Atleast 4 Meetings Of The Board In AYear With Maximum Gap Of 4 Months Between 2 Meetings. ToReview Operational Plans, Capital Budgets, QuarterlyResults, Minutes Of Committee’s Meeting.Director Shall NotBe A Member Of More Than 10 Committee And Shall Not Act AsChairman Of More Than 5 Committees Across All Companies

Management Discussion And Analysis Report CoveringIndustry Structure, Opportunities, Threats, Risks,Outlook, Internal Control System

Information Sharing With Shareholders

 Non-Mandatory Recommendations:

Role Of Chairman Remuneration Committee Of Board

Shareholders’ Right For Receiving Half Yearly Financial PerformancePostal Ballot Covering Critical Matters Like Alteration In Memorandum Etc

Sale Of Whole Or Substantial Part Of The Undertaking

Corporate Restructuring

Further Issue Of Capital

Venturing Into New Businesses

As per the committee, the recommendations should be madeapplicable to the listed companies, their directors,management, employees and professionals associated with suchcompanies, in accordance with the time table proposed in theschedule given later in this section. Compliance with the codeshould be both in letter and spirit and should always be in amanner that gives precedence to substance over form. Theultimate responsibility for putting the recommendations intopractice lies directly with the board of directors and themanagement of the company.

The recommendations will apply to all the listed private andpublic sector companies, in accordance with the schedule ofimplementation. As for listed entities, which are notcompanies, but body corporates (e.g. private and public sectorbanks, financial institutions, insurance companies etc.)incorporated under other statutes, the recommendations willapply to the extent that they do not violate their respectivestatutes, and guidelines or directives issued by the relevantregulatory authorities. The Committee recognizes thatcompliance with the recommendations would involve restructuring

the existing boards of companies. It also recognizes that somecompanies, especially the smaller ones, may have difficulty inimmediately complying with these conditions. Therecommendations were implemented through Clause 49 of theListing Agreements, in a phased manner by SEBI.

Financial Disclosures to be Made: The cash flow statement as per the listing agreement

required to be mandatorily prepared in accordance with therelevant accounting standard.

Additional disclosures to be made in the unaudited financial quarterly results of the companies to make thesemore transparent and meaningful.

Limited review by auditors for half -yearly results. Prior intimation about Board Meeting at which declaration

of dividend is considered to be made at least seven days in advance.

Announcement by the companies on dividend, rights etc. to be made only after the close of the market hours to avoid excessive volatility in stock prices.

Naresh Chandra Committee Report Ministry of Corporate Affairs , earlier known as Department ofCorporate Affairs under Ministry of Finance, is primarilyconcerned with the administration of the Companies Act, 1956,and other allied Acts, etc framed there-under for regulatingthe functioning of the corporate sector in accordance with thelaw. It is also responsible for administering the CompetitionAct, 2002 and exercises supervision over the three professionalbodies, namely, Institute of Chartered Accountants of India(ICAI), Institute of Company Secretaries of India (ICSI) andInstitute of Cost and Works Accountants of India (ICWAI), whichhave been constituted for proper and orderly growth of theprofessions concerned.

It also has the responsibility of carrying out the functions ofthe Central Government relating to administration of

Partnership Act, 1932, the Companies (Donations to NationalFunds) Act, 1951 and Societies Registration Act, 1980.

The Ministry of Corporate Affairs had appointed a high levelcommittee in August 2002 to examine various corporategovernance issues.

Recommendation and Changes: the statutory auditor-company relationship so as to

further strengthen the professional nature of this interface;

the need, if any, for rotation of statutory audit firms orpartners;

the procedure for appointment of auditors and determination of audit fees;

restrictions, if necessary, on non-audit fees; independence of auditing functions; measures required to ensure that the management and

companies actually present 'true and fair' statement of the financial affairs of companies;

the need to consider measures such as certification of accounts and financial statements by the management and directors;

the necessity of having a transparent system of random scrutiny of audited accounts;

adequacy of regulation of chartered accountants, company secretaries and other similar statutory oversight functionaries;

advantages, if any, of setting up an independent regulatorsimilar to the Public Company Accounting Oversight Board in the Sarbanes Oaxley Act (SOX Act), and if so, its constitution; and

role of independent directors, and how their independence and effectiveness can be ensured.

Committee's Mandatory Recommendation: Disqualifications for audit assignments; List of prohibited non-audit services;

Independence Standards for Consulting and Other Entities that are Affiliated to Audit Firms;

Compulsory Audit Partner Rotation; Auditor's disclosure of contingent liabilities; Auditor's disclosure of qualifications and consequent

action; Management's certification in the event of auditor's

replacement; Auditor's annual certification of independence; Appointment of auditors; Setting up of Independent Quality Review Board; Proposed disciplinary mechanism for auditors; Defining an independent director; Percentage of independent directors; Minimum board size of listed companies; Disclosure on duration of board meetings/committee

meetings; Additional disclosure to directors; Independent directors on Audit Committees of listed

companies; Audit Committee charter; Remuneration of non-executive directors; Exempting non-executive directors from certain

liabilities; Training of independent directors; SEBI and Subordinate Legislation; Corporate Serious Fraud Office; etc.

National Foundation for Corporate Governance (NFCG)

Ministry of Corporate Affairs has set up a National Foundationfor Corporate Governance (NFCG) in association with CII, ICAIand ICSI, as a not-for-profit trust. It provides a platform todeliberate on issues relating to good corporate governance, tosensitize corporate leaders on importance of good corporategovernance practices as well as facilitate exchange ofexperiences and ideas amongst corporate leaders, policy makers,regulators, law enforcing agencies and non- governmentorganizations.

The NFCG has a three-tier structure for its management, viz,the Governing Council under the Chairmanship of Minister ofCorporate Affairs, the Board of Trustees and the ExecutiveDirectorate.

NFCG had framed an action plan, which includes development of good corporate governance principles on identified themes i.e. (i) corporate governance norms for institutional investors, (ii) corporate governance norms for independent directors, and (iii) corporate governance norms for audit.

The foundation has been set up with the mission to: foster a culture for promoting good governance, voluntary

compliance and facilitate effective participation of different stakeholders;

create a framework of best practices, structure, processesand ethics;

make significant difference to Indian corporate sector by raising the standard of corporate governance in India towards achieving stability and growth

Harmonization

It was suggested that SEBI should work towards harmonizing theprovisions of clause 49 of the Listing Agreement and those ofthe Companies Act, 1956. The Committee noted that majordifferences between the requirements under clause 49 and theprovisions of the Companies Act, 1956 should be identified.SEBI should then recommend to the Government that theprovisions of the Companies Act, 1956 be changed to bring it inline with the requirements of the Listing Agreement.

Cadbury Committee Report on Corporate GovernanceThe 'Cadbury Committee' was set up in May 1991 with a view toovercome the huge problems of scams and failures occurring inthe corporate sector worldwide in the late 1980s and the early1990s. It was formed by the Financial Reporting Council, theLondon Stock of Exchange and the accountancy profession, withthe main aim of addressing the financial aspects of CorporateGovernance.

Objectives:

Uplift the low level of confidence both in financialreporting and in the ability of auditors to provide thesafeguards which the users of company's reports sought andexpected;

Review the structure, rights and roles of board ofdirectors, shareholders and auditors by making them moreeffective and accountable;

Address various aspects of accountancy profession and makeappropriate recommendations, wherever necessary;

Raise the standard of corporate governance; etc. Keepingthis in view, the Committee published its final report on1st December 1992.

Best Practices

The report was mainly divided into three parts:-

Structure and responsibilities of Boards of Directors

The boards of all listed companies should comply with the Codeof Best Practice. All listed companies should make a statementabout their compliance with the Code in their report andaccounts as well as give reasons for any areas of non-compliance.

Code of Best Practice and Recommendations

i. Board of Directors - The board should meet regularly,retain full and effective control over the company andmonitor the executive management. There should be aclearly accepted division of responsibilities at the headof a company, which will ensure a balance of power andauthority, such that no one individual has unfetteredpowers of decision. Where the chairman is also the chiefexecutive, it is essential that there should be a strongand independent element on the board, with a recognizedsenior member. Besides, all directors should have accessto the advice and services of the company secretary, whois responsible to the Board for ensuring that boardprocedures are followed and that applicable rules andregulations are complied with.

ii. Non-Executive Directors - The non-executive directorsshould bring an independent judgment to bear on issues ofstrategy, performance, resources, including keyappointments, and standards of conduct. The majority ofnon-executive directors should be independent ofmanagement and free from any business or otherrelationship which could materially interfere with theexercise of their independent judgment, apart from theirfees and shareholding.

iii. Executive Directors - There should be full and cleardisclosure of directors’ total emoluments and those of thechairman and highest-paid directors, including pensioncontributions and stock options, in the company's annualreport, including separate figures for salary andperformance-related pay.

iv. Financial Reporting and Controls - It is the duty of theboard to present a balanced and understandable assessmentof their company’s position, in reporting of financialstatements, for providing true and fair picture offinancial reporting. The directors should report that thebusiness is a going concern, with supporting assumptionsor qualifications as necessary. The board should ensure

that an objective and professional relationship ismaintained with the auditors.

Role of Auditors and Recommendations to the AccountancyProfession

The annual audit is one of the cornerstones of corporategovernance. It provides an external and objective check on theway in which the financial statements have been prepared andpresented by the directors of the company. The CadburyCommittee recommended that a professional and objectiverelationship between the board of directors and auditors shouldbe maintained, so as to provide to all a true and fair view ofcompany's financial statements. Auditors' role is to designaudit in such a manner so that it provide a reasonableassurance that the financial statements are free of materialmisstatements. Further, there is a need to develop moreeffective accounting standards, which provide importantreference points against which auditors exercise theirprofessional judgment. Secondly, every listed company shouldform an audit committee which gives the auditors direct accessto the non-executive members of the board. The Committeefurther recommended for a regular rotation of audit partners toprevent unhealthy relationship between auditors and themanagement. It also recommended for disclosure of payments tothe auditors for non-audit services to the company. The Accountancy Profession, in conjunction with representativesof preparers of accounts, should take the lead in:-

Developing a set of criteria for assessing effectiveness; Developing guidance for companies on the form in which

directors should report; Developing guidance for auditors on relevant audit

procedures and the form in which auditors should report. However, it should continue to improve its standards and procedures.

Dealing with the Rights and Responsibilities of Shareholders

The shareholders, as owners of the company, elect the directorsto run the business on their behalf and hold them accountablefor its progress. They appoint the auditors to provide anexternal check on the directors’ financial statements. TheCommittee's report places particular emphasis on the need forfair and accurate reporting of a company's progress to itsshareholders, which is the responsibility of the board. It isencouraged that the institutional investors/shareholders tomake greater use of their voting rights and take positiveinterest in the board functioning. Both shareholders and boardsof directors should consider how the effectiveness of generalmeetings could be increased as well as how to strengthen theaccountability of boards of directors to shareholders.

N.R Narayan Murthy Report on Corporate Governance With the belief that the efforts to improve corporategovernance standards in India must continue because thesestandards themselves were evolving in keeping with the marketdynamics, the Securities and Exchange Board of India (SEBI) hadconstituted a Committee on Corporate Governance in 2002 , inorder to evaluate the adequacy of existing corporate governancepractices and further improve these practices. It was set up toreview Clause 49, and suggest measures to improve corporategovernance standards.

The SEBI Committee was constituted under the Chairmanship ofShri N. R. Narayana Murthy, Chairman and Chief Mentor ofInfosys Technologies Limited. The Committee comprised membersfrom various walks of public and professional life. Thisincluded captains of industry, academicians, public accountantsand people from financial press and industry forums.

Terms of Reference of the committee:

Review the performance of corporate governance; and

Determine the role of companies in responding to rumourand other price sensitive information circulating in themarket, in order to enhance the transparency and integrityof the market.

The issues discussed by the committee primarily related toaudit committees, audit reports, independent directors, relatedparties, risk management, directorships and directorcompensation, codes of conduct and financial disclosures.

The committee's recommendations in the final report wereselected based on parameters including their relativeimportance, fairness, accountability, transparency, ease ofimplementation, verifiability and enforceability.

Mandatory Recommendations:

strengthening the responsibilities of audit committees; Improving the quality of financial disclosures, including

those related to related party transactions and proceedsfrom initial public offerings;

Requiring corporate executive boards to assess anddisclose business risks in the annual reports ofcompanies;

Introducing responsibilities on boards to adopt formalcodes of conduct; the position of nominee directors; and

Stock holder approval and improved disclosures relating tocompensation paid to non-executive directors.

Non-mandatory Recommendations:

Moving to a regime where corporate financial statementsare not qualified;

Instituting a system of training of board members; and

Evaluation of performance of board members.

As per the committee, these recommendations codify certainstandards of 'good governance' into specific requirements,since certain corporate responsibilities are too important tobe left to loose concepts of fiduciary responsibility. Theirimplementation through SEBI's regulatory framework willstrengthen existing governance practices and also provide astrong incentive to avoid corporate failures.

The Committee noted that the recommendations contained in theirreport can be implemented by means of an amendment to theListing Agreement, with changes made to the existing clause 49.

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